It soon became apparent to many that the Nice Treaty had made decision-making within the EU harder, not easier. Not only were the voting rules more complicated, but the threshold for achieving a qualified majority rose once the new members joined, from around 71% of votes to just over 74%.

In a 27-member EU it is fairly easy for the big countries to block proposals which they don’t like. All they need is 91 votes or 38% of the population. Policymaking gridlock was therefore a serious risk.

The provisions of the Nice Treaty remain in force until such time as the subsequent Lisbon Treaty is ratified by all 27 members.

The proposed solution was the European Constitution, agreed by member governments in June 2004. But this failed to find favour with voters in France and the Netherlands at referendums staged in may of the following year.

The immediate aftermath of these ‘no’ votes marked one of the lowest points for the proponents of the ‘European project’. The rejections demonstrated all too clearly that a disconnect had emerged between the EU’s institutions and the ordinary people of Europe.

A lengthy re-think was in order, culminating in agreement on a less ambitious ‘Reform Treaty’ in June 2007. Once signed in December of that year it became generally known as the Lisbon Treaty.

It includes further amendments to the voting system, a President of the Council who will serve a term of two and a half years, a foreign policy ‘High Representative’ to present a consistent EU view on international affairs, and a greater role for the European Parliament in decision-making.

As with all EU treaties, it cannot take effect until all 27 members have ratified it in whatever way each country deems appropriate.

Ratification has proved to be a tortuous process, with the Irish initially rejecting the treaty in a referendum held in June 2008, just as they did the Treaty of Nice.

Nonetheless, barring some political wranglings in the Czech Republic, where the Euro-sceptic President is delaying signing the instrument of ratification passed by both houses of parliament, the Lisbon Treaty will probably take effect from January 2010.

Even so, it will be several years before its provisions are implemented, during which time the Nice rules will remain in place.

In the meantime, the EU is embarking on the next phase of enlargement. While negotiations with Turkey continue to drag on without getting very far, a concerted push is underway to prepare the countries of the western Balkans for eventual membership.

In addition to Turkey, both Croatia and the Former Yugoslav Republic of Macedonia have gained official candidate status. Six further countries are making their way through the process which could lead to them becoming formal candidates. These are Serbia, Montenegro, Kosovo, Albania, Bosnia-Herzegovina, and Iceland.

In the case of Iceland, applying to join the EU was a response to the banking crisis which overwhelmed the country in 2008. The parliamentary vote to seek membership was passed by only a narrow majority, so that it is by no means certain that they will end up joining.

But with Iceland being an advanced economy that already incorporates many aspects of EU regulations into its laws, it could join (along with Croatia) as early as 2011.

Thereafter the enlargement process will be much slower, given the work that will have to be done to equip the countries of the western Balkans with the legal and institutional capacity to cope with EU membership. Even so, there is a realistic prospect that by 2020 the EU could have 36 members.

While enlarging the EU makes sense in a number of respects, the range of economic structures is widening, social structures are more diverse, the commonality of interests is becoming harder to identify, and an equitable distribution of power is more difficult to establish.

All this means that the EU is becoming harder to manage and like companies, diseconomies of scale can set in, a situation in which the whole is less than the sum of its parts.

Yet while the economics may not always seem to stack up it should never be forgotten that for many of the peoples of continental Europe, the EU is essentially a political quest.

With most of the continent having been either occupied by the Nazis or forcibly held within the pseudo-empire of the Soviet Union, participating in the EU is about ensuring that these things never happen again.

It is also a dimension of the ‘European Project’ that is not appreciated by most people in Britain, whose judgement therefore tends to be made on economic or nationalistic grounds.

Back in 1998, in straight money terms, GDP per head in the 12 countries that joined in 2004 and 2007 (the AC-12) was just one sixth of that for the EU-15 countries.

Even when measured in terms of purchasing power parities (PPPs), which adjust for the fact that prices of goods and services are generally much lower in the AC-12, their GDP per head was still only 37% of the EU-15 figure.

The progress that has been made in the years since is reflected in the fact that in 2008 nominal GDP per head in the AC-12 had reached 31% of the level in the EU-15, while GDP per head measured in terms of PPPs had climbed to 49%.

Table 18.1: Living standards in EU countries and candidate countries
(GDP per head in terms of purchasing-power parities)

The population of the 12 new members, at 103 million, is a little bigger than that of Germany and the Netherlands combined. Their GDP, at around US$1.4 trillion in 2008, was a little less than that of Spain.

Nonetheless, they have achieved rapid growth in recent years, so that in 2008 their combined nominal GDP was 8.5% as big as that of the EU-15, as against just 5.7% four years earlier.

While a good deal of this increase is due to the effects of higher inflation rates, real rates of growth have also been much stronger in the AC-12. Taken together, their real GDP expanded at a brisk average annual rate of 4.4% in the decade to 2008, and was consistently above 4% after 2003, exceeding 6% on two occasions.

By contrast, the average growth rate for the EU-15 was just 2.2% during the same decade.

The EU Commission estimates that the accession process has boosted annual growth rates in the AC-12 by around 1.75%, thanks to the inflow of FDI, the associated technology transfers and the productivity improvements that have followed, and a reduction in interest rates.

In fact, just over three quarters of the AC-12’s nominal GDP in 2008 came from four countries: the Czech Republic, Hungary, Poland, and Romania. Poland alone accounted for 37%. But the range of living standards is still very wide.

Slovenia’s GDP per head measured in terms of PPPs has reached 82% of the EU-15 level, and is nearly on a par with Spain and Greece. At 71% of the EU-15 figure, the Czech Republic is well ahead of Portugal, which at just 62% of the EU-15 figure is that group’s clear laggard.

On the other hand, GDP per head in Bulgaria and Romania is still well below 40% of that in the EU-15. Meanwhile, many of the potential candidates for membership from the western Balkans are currently at less than 30%.

The accession of new members from central and eastern Europe has allowed manufacturers in western Europe to take advantage of lower labour costs and cheaper land. With the process of accession producing greater institutional stability and legal certainty, businesses from western Europe have sought to enhance their competitiveness by extending the geographical spread of their production processes.

The result has been a surge in foreign direct investment (FDI) flowing from west to east, and an accompanying boom in trade in goods.

Between 1999 and 2007 the value of the trade in goods flowing in both directions between the EU-15 and the AC-12 increased nearly threefold when valued in Euros, from €175 billion to €501 billion, representing an annual average growth rate of over 14%.

Over the same period, the AC-12 became more important to the EU-15 as export markets, accounting for 7.5% of exports in 2007 as against 4.7% eight years earlier. This means that the AC-12 taken together are now on a par with the US as a market for the EU-15.

By contrast, the countries of the EU-15 have become less important as export markets for the AC-12, with their share of exports declining from 68.6% to 59.7%. This is not a surprise, given that trade has expanded rapidly between AC-12 countries, while flows of FDI have also boosted exports to new markets outside the EU.

A recent study by the EU Commission into the impact of the 2004 enlargement, found that the new members had been able to increase their share of global exports from just 2.1% in 1999 to 3.9% in 2007.

Not surprisingly, their share of exports flowing into the EU-15 also rose, from 3.9% to 7%. But the overall improvement in the range and competitiveness of their manufacturing sectors is demonstrated by the doubling of their share of exports to all non-EU countries over the same period from 0.6% to 1.3%.

Not surprisingly, those countries which border the EU-15 have gained most from this process, especially the Czech Republic, Poland, and Slovakia, all of which have become important centres for the assembly of motor vehicles.

Rising living standards in central and eastern Europe have not only offered new markets for suppliers of goods and services from western European countries, but have also spurred trade among the AC-12 countries.

In the eight years to 2007 the proportion of their exports going to other AC-12 countries rose from a tenth to a sixth.

Table 18.2: Share of AC-12 exports to the EU-15 (per cent)

Table 18.3: Share of EU-15 exports to the AC-12 (per cent)

Table 18.3 highlights the extent to which exports to the AC-12 are more important to some EU-15 countries than to others. In the case of the UK, for instance, they accounted for only 3.4% of exports in 2007.

Moreover, the increase in the share of exports has also been less for the UK than for most other EU-15 countries. Not surprisingly, the story is very different for those of the EU-15 which have land borders with accession countries. For Germany, the EU’s new member states now account for nearly an eighth of total exports of goods.

As manufacturers in western Europe continue to grapple with increasing competition from low-cost producers, especially China, outsourcing production to new EU member countries in eastern Europe will remain an important strategy in the years ahead.

But given the distance from western Europe to some of the Balkan countries, these countries are unlikely to experience the same boom in trade as did the likes of Poland and the Czech Republic. The possible exception is Croatia, which is easily accessible from southern Germany, Austria, and Italy.

The creation of market economies in eastern Europe and their subsequent absorption into the EU has had a significant impact on the competitive environment faced by businesses in existing EU members.

Not only are unit labour costs substantially lower in the AC-12, but in many cases the taxation regime for businesses is also more benign.

Not surprisingly, eastern Europe has attracted an increasing share of inward investment in recent years, with companies from Germany, the US, Austria and France being the most active investors.

At one point earlier this decade, inward FDI was accounting for more than a quarter of total fixed capital formation in the new member states. It will be several decades before the countries of eastern Europe have caught up in terms of living standards and labour costs, suggesting that they retain advantages as destinations for FDI.

The inexorable eastward movement of manufacturing jobs and capacity has exacerbated the painful process of transition in western Europe that was already underway on account of outsourcing to China.

In particular, large companies will have new options to make use of cheaper manufacturing locations in the same way that US companies have for many years sited their more labour-intensive activities over the border in Mexico. This should help to improve Europe’s competitive position on the global stage.

There is also little evidence that the AC-12 countries are harming exporters in the EU-15. For the most part, producers in eastern and western Europe do not compete against each other in third markets.

The EU-15 generally specialise in high-technology products and in services, while the AC-12 countries concentrate on supplying more basic products, such as bulk chemicals, standard grades of steel, mass-market cars, and agricultural produce.

Many people in western Europe have viewed the EU’s eastward expansion with suspicion. This is largely on account of fears that a flood of migrants will steal their jobs or take advantage of more generous welfare provision.

These concerns ignore the harsh demographic realities which confront western Europe.

Within a few years the working-age population of the EU-15 is expected to start falling. It is predicted to shrink by a quarter over the next four decades, with dire consequences for an already meagre trend rate of economic growth.

The EU Commission estimates that since the EU’s enlargement in 2004 the number of citizens from the 12 new member countries living in the 15 old member countries increased by around 2.2 million.

While the UK has been the most popular destination for migrant workers from the AC-12, whose influx has increased the workforce by around 1.2%, the biggest impact has been in Ireland, where they augmented the workforce by around 5%.

The transitional restrictions which many of the EU-15 put in place are gradually being removed, and will be gone altogether in 2011.

While these restrictions helped to assuage public opinion, from the standpoint of creating a more flexible labour market, such controls were of questionable economic value.

There is clearly a downside to expansion for some people and regions in the EU-15.

Jobs in some industries will move to eastern Europe and those regions which have become accustomed to generous handouts from Brussels will have to make do with much less or go without altogether.

But in overall terms, there is little doubt that taking in new members has brought economic benefits to the whole of Europe.

The markets of the AC-12 will expand at a relatively rapid pace for many years to come, while there will be opportunities for large corporates to become more efficient, and an incentive for governments in the EU-15 to press on with the task of structural reform.

At the same time, it is unrealistic to expect the countries of eastern Europe to make anything more than a small and subtle contribution to rectifying the long-standing malaise facing many economies in the west of the continent.